Why do you invest? At first blush, the question may seem silly. You may think, as I did earlier in my career, that everyone invests for a one single reason. The goal is to gain, or increase the return on one’s capital. Or, to say it most plainly, people invest to make money. That’s it, or so I thought.
Over years of practice and study, though, I have learned that people invest for a lot of different reasons. And while all investors may share the hope of financial gain, it is hardly their sole motivation. So what is it that investors are trying to achieve? What is the good outcome that they pursue for themselves?
Most of the motivations driving investor behavior can be divided into the following categories. Beyond the wish to make money, people invest out of the desire to be safe, to be clever, to be wise, or to feel connected to a peer group.
Investing To Be Safe
Many people feel insecure about their money. For some, this manifests itself as a strong aversion to risk. A number of folks are just terrified of losing money. It may seem a paradox that one who is scared of financial loss would seek to invest what they desperately wish to keep safe. There is, however, method to that madness. Some readily available investments are considered extremely safe. Indeed, lending money to the United States is presumably far safer than “non-investment” alternatives such as keeping money in the mattress. Sometimes a program of investment is designed less to gain wealth than to avoid losing it.
Not all who seek safety are risk averse, however, and those desires don’t always lead to a conservative investment program. Sometimes an aggressive portfolio, aimed at achieving high returns, helps people feel that they are advancing the overall level of security in their life. Whether it is to advance a particular goal, such as a comfortable retirement, or for a more generalized sense of wellbeing, investing can produce a feeling of taking action to create a safer future.
Needless to say, some types of investments may actually make someone safer while others create only a delusion. In finance, as in other areas of life, increased security may be real or illusory. Either way, though, trying to satisfy the need can be a powerful driving behind investment decisions.
Investing To Be Clever
Many investors seek to somehow “get ahead.” They want to gain advantage with their investments. People who view life as a kind of contest are often obsessed with winning it. If one is open to such a view, the investment markets make for an almost perfect game within the game. Hence the television commercial for a brokerage house in which an investor declares that he is in the markets “to win.” Actually making money can take a back seat to a feeling of “emerging triumphant.”
Although it can be minimized through science or prudence, there is always some part of investing that is akin to gambling. For those who find “games of chance” to their liking, or are addicted to them, the investment markets are a perfect match. Furthermore, most gamblers don’t see it as “chance” at all. Rather, they are almost obsessed with gaining an advantage in the game. If they are clever enough, the belief goes, they will win. Thus an imagined meritocracy can grow out of even games of pure randomness
Our society has gone a long way toward labeling those who invest successfully as the ultimate winners. When high profile mutual fund managers are treated as rock stars and hedge fund guys live better than kings, it is hard to escape the message that investing well is among the highest of human achievements. Heck, the United States even has a special tax rate to reward such endeavors.
Investing To Be Wise
Many people invest out of a desire to do “the right thing.” They seek to act sagaciously and responsibly both to achieve life’s legitimate rewards and as an end in itself.
The history of financial markets in the twentieth century shows investing not only to be industrious but also prudent. It is sensible to save some of your money. The smartest thing to do with those savings is investing in the various stock, bond, and other investment vehicles made readily available by the financial services industry. One has every reason to participate.
Those concerned with stewardship can also be viewed as trying to act wisely. Some seek to continue caring for loved ones after their own death. Others want to shepherd certain people or causes into the future as, for example, when a grandparent finances her grandchildren’s college educations. Many investors are trying to further their estate planning goals; they wish to leave something and are concerned not only with who will receive it but, also, with how much it will be worth.
For those who have successfully delegated authority in other areas of their lives, wisdom may be found in selecting just the right person for the job. A gerontologist who I admire has long cared for his elderly patients by identifying medical problems and then selecting just the right specialist to deal with each one. He views his role as an investor the same way; find the right man or woman and put the matter into those capable hands. For this good man, taking care and selecting wisely are essentially the same thing.
Almost everyone wants to feel that they have made the “right choices.” Or, at least, that the most egregious mistakes have been avoided. To the extent that investing represents steering the ship of our financial lives, everyone wants to believe they have successfully avoided the jagged rocks and navigated to the safe harbor.
Many people sleep better at night knowing that they have acted judiciously in looking after their financial assets. They place great importance on having done the very best they could with what they have. Both comfort and satisfaction can come from knowing that you have done the wise, smart or prudent thing regarding those elements of life that have great value.
Investing To Feel Like Part of the Group
Almost everyone wants to belong. For some, that means feeling attachment to the groups we naturally fit into. For others, the desire is not to be part of just any group but, rather, to connect with a group that we admire, envy, or look up to. Groucho Marx famously said that he would not want to join any club that would have someone like himself for a member. Investing can play a significant role in how some people see themselves and their place in the community.
For many people, the particulars of an investment program are a way to feel that they are doing as well as others. They want to keep up with the Joneses or, at the least, not feel they are somehow inferior. They need to be able to hold their head up in the group. A sense of successful investing can play a significant role in this desire to fit in with certain groups.
In a similar vein, some people fear being “left out” or excluded from the social group in which they seek to belong. The ability to hold one’s own at cocktail party or in the water cooler discussion has significant value. Frequently, the particulars about their investments are useful in gaining the place they seek. Ideally, they may win admiration. At the least, they will be seen as an appropriate member of the group.
For a small but significant number of people, it is not their natural peer group but a more desirable one where they wish acceptance. Some seek to do what the cleverest or most in-the-know people are doing; they are forever seeking to emulate “the smart money.” Others want to fit in with what used to be called “the beautiful people.” They are interested in investing with, and like, those who society elevates. Still others seek to influence through their proximity and imitation of power people. One may think of Jay Gatsby throwing those grand parties for all those upper class New Yorkers.
Of course, those who seek acceptance or social advantage through their investments are very vulnerable. A virtual army of financial people stands ready to take advantage of such behavior. To take only the most egregious example, why did all those folks hand their money over to Bernie Madoff when even a little deliberation would lead to the conclusion that his deal was too good to be true? Those who would like their money to mingle with that of elite people must take great care that they are not shear like sheep in the process.
It is easy to understand, though, that investors may seek to join with those they see as most clever, able, connected, or even fashionable. We are human beings and seeking to emulate and be in the company of leaders comes naturally to us.
Having explored various investor motivations, beyond simply “making money”, we return to the opening question. Why do you invest? What personal goals are you seeking to advance? Is it worth the effort to review whether your methods are actually leading to your goals?